Question
QUESTION 1 Sanders Stone Manufacturing, Inc. is in the process of replacing an old machine and is now looking into a new proposed machine. The
QUESTION 1 Sanders Stone Manufacturing, Inc. is in the process of replacing an old machine and is now looking into a new proposed machine. The new machine costs $45,000 and has installation costs of $5,000 and will operate for only three years. The machine will be depreciated using a three-year recovery schedule (with MARCS depreciation rates of 45%, 33%, 15%, 7% for years 1 to 4, respectvely. The new equipment is expected to result in incremental before tax revenue of $15,000 per year and $1,000 increase in cost. New machines requires an additional net working capital of $5,000 today but will be recovered at the end of the 3rd year. The new machine is expected to be sold for $20,000 before taxes at the end of 3rd year. The firm has a 22% percent tax rate and its cost of capital is 10%.
e) What is the new machine's terminal cash flow?
f) What is the NPV of this asset? Should the company buy the new asset?
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